BEIJING (Reuters) - China auto sales grew 7 percent in the first quarter, China's automakers' association said on Tuesday, with the strongest January-March period since 2014 setting up the world's largest auto market for a better-than-expected year.

Many in the industry had feared that sales would be weak in the first three months after the government rolled back a tax cut on small engine cars on Jan. 1, contributing to expectations for a slowdown in 2017 sales.

But first-quarter growth outpaced the China Association of Automobile Manufacturers' (CAAM) prediction in January that auto sales would grow 5 percent in 2017, and the market is expected to improve further as the year progresses.

"Our current attitude should be cautiously optimistic, as in reality we still feel there is pressure," said Xu Haidong, a CAAM spokesman, explaining why it was not adjusting the 5 percent forecast.

"This is because of policy changes, as well as related economic trends and other reasons."

Vehicle sales rose 4 percent year-on-year in March to 2.5 million vehicles, CAAM told reporters in Beijing.

The purchase tax for cars with engines of 1.6 litre capacity or below climbed to 7.5 percent this year from 5 percent in 2016 after the government stepped in to stimulate slumping sales. The tax will rise to the normal 10 percent rate next year.

"We've always planned for the fact that (in) the first quarter there would be payback from the pull forward of sales into the fourth quarter (before the incentive was reduced)," Mark Fields, chief executive of Ford, told reporters in Shanghai on Saturday ahead of the CAAM figures.

"We expect the second, third and fourth quarter to show improvement."

Ford predicts that China's overall auto sales will be flat or down slightly this year, Fields said. The U.S. automaker is due to report its March China sales on Wednesday.

US rival General Motors reported last week that its China sales in the first quarter fell 5.2 percent year-on-year, with the automaker citing the impact of the tax-cut reduction. China is GM's most important market for Buick, and GM is planning an electric vehicle there. Ford has also announced extensive electrification plans in China.

Automakers with a steady stream of new models, particularly in the hot-selling sport-utility vehicle (SUV) segment like Japan's Honda, continue to lead the market. Honda reported its sales grew 16.6 percent in the first quarter.

Reporting by Lusha Zhang and Jake Spring

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